Canada hasn’t been the best place to invest in recent years, performance-wise, compared with the United States. Add the more recent risks of pipeline politics and tense North American free-trade agreement (NAFTA) negotiations, and it’s easy to see why some investors might still be skeptical.
CIBC Asset Management’s senior portfolio manager Craig Jerusalim, who oversees about $5.5-billion in assets under management, sees it differently. He’s betting Canadian markets outperform their U.S. peers in the coming quarters, thanks in part to rising oil prices, a lower Canadian dollar that helps exporters, and strong employment.
The Globe recently spoke with Mr. Jerusalim – whose CIBC Dividend Growth Fund returned 7.4 per cent, after fees, for the 12 months ended May 17 – about some stocks he’s been buying and selling and a retail play with a high valuation that he’s considering buying again.
Describe your investing style.
My style is high-quality growth at a reasonable price. The five things I look for are: high margins – due to a sustainable competitive advantage; a strong balance sheet; low variability in earnings; a strong management team; and a long trajectory of growth.
What concerns are you hearing from investors today?
One of the big concerns I hear is the debate between active and passive management. The concern has been, ”Why haven’t active managers been able to beat the passive benchmark?” Part of the answer is there have been too many active managers and it became harder to beat the passive benchmark. Looking forward, the pendulum has shifted to overweight the amount of assets going into passive [investments]. It becomes easier for the active manager to differentiate between better and more strategic companies. [Another concern] is recent market volatility. Investors were lulled into a false sense of low volatility in 2016 and 2017. The volatility we’re seeing in 2018 is actually a return to normal levels.
What’s your take on where the markets are heading in the short term?
I believe the Canadian markets are poised to outperform their U.S. counterparts in the near term. There are a number of reasons: High energy prices, combined with a narrowing of the differential relative to the U.S. benchmark pricing, are extremely positive for Western Canada. Also, the lower Canadian dollar, which is being kept down because of the trade overhang and diverging interest-rate policies, also helps manufacturers and exporters and overall corporate profit for Canadian companies. Accommodative fiscal and monetary policies are stimulative. There’s also the relative valuation: the S&P 500 is still trading above 17 times 2018 earnings whereas the S&P/TSX is trading below 16 times earnings. Employment is also strong in Canada and the United States, but in Canada there is slightly more slack in our labour force, which means less risk of rapid wage inflation. All we need to see is the North American free-trade agreement negotiations settled to regain confidence … and I think it really sets up the TSX to outperform the S&P 500 over the next few quarters.
What stocks have you been buying lately?
Two high-quality growth companies I’ve been buying are Spin Master and NFI Group, formerly called New Flyer. We see Spin Master as an extremely innovative company that has a multiyear runway for growth … given the universal appeal of their lineup of toys. The Toys “R” Us bankruptcy resulted in a temporary pullback of the stock. However, even that unfortunate event likely gets spun into a positive for Spin Master as it likely leads to more M&A [merger and acquisition] opportunities given its strong cash position. (There will likely be many smaller companies that will be forced to sell or risk going bankrupt due to Toys “R” Us closing). That further bolsters Spin Master’s long-term growth prospects.
NFI Group [which manufactures heavy-duty transit and coach buses] is another company with an underappreciated runway for growth. This past quarter, the consensus seemed to focus more on short-term volatility and lost sight of the company’s attractive longer-term profit growth. It was an attractive buying opportunity for a long-term investor. We really like management’s conservatism … as well as the company’s strong financial position and attractive cash-flow generation.
What stocks have you been selling?
We’ve been selling companies where growth prospects have been diminished. That includes select [Canadian] grocers that are facing strong competition from new entrants such as Amazon. Over the past year, where we’ve had a change in the interest rate environment from rates falling to rates beginning to rise, there’s been a shift in the portfolio away from interest-rate-sensitive [equities] like REITs [real estate investment trusts] and utilities towards companies that benefit like banks and insurance. We still have some exposure to select REITs and utilities.
What’s the one stock you wish you bought?
Canada Goose. I was an investor at the IPO. I’m not a shareholder right now, however, I’m re-examining their global expansion and whether their long-term prospects warrant a reinvestment today, despite current high valuations.
This interview has been edited and condensed.